Question

Your brother, who is prone to bearing substantial risk, suggests that you buy a security for $10,000 that promises to pay you $100,000 at the end of 15 years. What is the implied annual return or yield on this investment

Answer 1

Answer:

16.59%

Explanation:

First we look at the formula which to determine the future value of the security and then work back to determine the annual return in terms of percentage

Future Value = Present Value x (1 +i)∧n

where i = the annual rate of return

n= number of years or period

We then plug the given figures into the equation as follows

we already know Present value to be $10,000 and the future value to be $100,000 and the number of years to be 15

Therefore, the implied annual return or yield on the investment is

100,000 = 10,000 x (1+i)∧15

(1+i)∧15 = 100,000/10,000 = 10

1 + i = (10∧(1/15))=1.165914

i= 1.165914-1

= 0.1659

= 16.59%